Willem F. Duisenberg, President of the European Central Bank, Lucas Papademos, Vice-President of the European Central Bank, Frankfurt, 9 January 2003
With a transcript of the questions and answers
Ladies and gentlemen, the Vice-President and I will report on the outcome of today's meeting of the Governing Council of the ECB, which was also attended by the President of the ECOFIN Council, Mr. Christodoulakis, and Commissioner Solbes.
We have reviewed monetary, financial and economic developments and updated our assessment in light of the new information available. Overall, we consider that the outlook for price stability in the medium term has not changed since our decision of 5 December to reduce the key ECB interest rates. We judge the current monetary policy stance appropriate to maintain a favourable outlook for price stability in the medium term. Hence, we have decided to keep our key rates unchanged.
As regards the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rates of M3 was 7.1% for the period from September to November 2002, unchanged from the period from August to October 2002. A strong preference of investors for liquid and secure assets, in an environment of continued financial market, economic and geopolitical uncertainty, remains a major driving force behind the strong monetary dynamics. Furthermore, the low level of interest rates prevailing in the euro area makes the holding of monetary assets relatively attractive.
As a result of the pace of monetary growth, liquidity in the euro area is ample. However, at the current juncture, given that the portfolio shifts due to economic and financial uncertainty may be a temporary phenomenon, and in light of the sluggish economic growth, the excess liquidity is deemed unlikely to translate into inflationary pressures. The continued decline in the growth of loans to the private sector up to November 2002 supports this assessment.
Turning to the second pillar, the outlook for economic activity in the euro area has remained broadly unchanged. As recently published survey data indicate, economic growth is likely to have remained subdued at the end of last year. For 2003, a gradual increase in real GDP growth rates to levels close to potential later in the year remains the main scenario, provided that the factors currently contributing to the general climate of uncertainty gradually unwind. Although some stabilisation in financial markets has been observed over the past couple of months, investors continue to perceive a high level of uncertainty. At the same time, there are still risks relating to a disorderly adjustment of the past accumulation of macroeconomic imbalances, especially outside the euro area. In addition, geopolitical tensions continue to weigh adversely on confidence. Indeed, the increase in oil prices over the past few weeks – besides being influenced by temporary supply constraints – reflects the risk of more acute tensions in oil markets in the future, which, in turn, would have a negative impact on the prospects for economic activity worldwide. There are still, therefore, downside risks to the outlook for economic activity in the euro area, although the current low level of interest rates should help to counterbalance these.
Turning to price developments, according to Eurostat's flash estimate, annual HICP inflation was 2.2% in December 2002, unchanged from November 2002. Due to the increase in oil prices, some renewed upward pressure on consumer prices is likely to have emerged around the turn of the year, and this pressure may have been reinforced by effects stemming from various increases in indirect taxes and administered prices which became effective at the beginning of 2003. At the same time, base effects – relating mainly to unprocessed food prices but, in part, also originating from past increases in services prices – will help to reduce annual HICP inflation figures in early 2003. Furthermore, the direct effects of the recent appreciation of the exchange rate of the euro on import prices and their gradual passthrough to the euro area economy should contribute to dampening consumer price inflation. The current subdued pace of economic growth should also contain inflationary pressures. While the significant risks surrounding oil price developments make any short-term prediction difficult at this stage, the most likely outcome remains that inflation will stabilise in the course of 2003 at a level below 2%.
A major condition for this outlook for inflation to materialise will be moderate wage developments. Reflecting the rigidities prevailing in euro area labour markets, wage growth remained on an upward trend until early 2002, despite the weakening of economic activity. It is not yet clear whether this trend has come to a halt. Wage moderation is crucial for maintaining price stability. Furthermore, it would help to improve the prospects for economic and employment growth.
An important contribution to strengthening growth prospects in the euro area should also come from fiscal and structural policies. Determined reform efforts are needed in these policy areas to increase incentives for investment and employment creation in the euro area.
Regarding fiscal policy, countries with remaining fiscal imbalances have committed themselves to implement consolidation plans in order to reach budgetary positions close to balance or in surplus in the medium term. As part of this process, governments should put emphasis on growth-oriented consolidation policies that strengthen the productive forces of the economy. Such policies are likely to be most effective when integrated into a comprehensive reform strategy based on structural retrenchment in spending.
The fiscal policy framework, as laid down in the Treaty and the Stability and Growth Pact, provides a sound basis for limiting the risk of fiscal imbalances occurring. At the same time, it preserves an appropriate medium-term orientation for fiscal policy, based on realistic assumptions regarding economic developments. The Governing Council supports the steps taken by the Commission to preserve the functioning of the framework, including the implementation of excessive deficit procedures and the issuing of early warnings, where required.
Turning to structural reforms, it is essential that governments intensify their efforts to expand the euro area's potential for non-inflationary growth and to reduce its high level of unemployment. The need for further progress in this field is particularly evident in a phase when the euro area economy has to adapt to a sequence of adverse shocks. Indeed, such reforms, which should aim to reduce rigidities in labour and goods markets, could significantly enhance the degree of resilience of economic activity to such shocks, both in the euro area as a whole and in its regions. Renewed momentum in the process of structural reform will be important to foster confidence among consumers and investors in long-term growth and employment opportunities in the euro area. This, in turn, should also have a positive effect on spending and investment decisions in the short and medium term.
We are now at your disposal for questions.
Transcript of the questions asked and the answers given by Dr. Willem F. Duisenberg, President of the ECB, Dr. Lucas Papademos, Vice-President of the ECB
Question: Would you agree with the opinion of some economists that the appreciation of the euro over the last couple of months is roughly equivalent to a 50 basis point rate increase by the ECB, which would have effectively neutralised your last rate cut in December? And secondly, would you agree that growth in the fourth quarter of last year and the first quarter of this year was probably about flat, and do you still rule out a contraction of the economy in the first quarter, as you said last time?
Duisenberg: On the first question, of course, the recent further appreciation of the euro is, in part, equivalent to a monetary "tightening". Apart from that, the exchange rate remains one of our important indicators which we take into account in assessing the risks to price stability when taking the overall decision, as we did today, to establish the monetary policy stance. The exchange rate counts, but it is not a one-for-one exchange in monetary policy measures and exchange rate developments, as you can well imagine and as you also well know. As regards your second question, it is not our expectation that there will be a contraction. We do expect very moderate growth and a slow resumption of growth throughout the year, including the first quarter.
Question (translation): After the introduction of the euro the share of the euro in the reserves of all national central banks worldwide fell to 11%. How long do you think it will take until this is increased in euro and what sort of marketing efforts are you making so that the share of the euro in the worldwide reserves of central banks increases to euro holdings of up to maybe 40%. And a second question: when you were head of the Dutch central bank you always had 50% of the reserves in US dollars and 50% in Deutsche Mark and related currencies. Now just a question to you personally, Mr Duisenberg: how do you invest? Do you invest in euro or in dollars, or do you invest in shares or in bonds? I would be very interested to hear your own personal point of view.
Duisenberg: I am in the happy circumstance that I do not have reserves. The share of the euro in worldwide reserves was – we do not have the figures for 2002 yet – around 13% at the end of 2001. And that was the same as the sum total of what we now call the legacy currencies, i.e. the Deutsche Mark, the French franc etc., represented in the reserves of third countries in the times before the euro. I have the impression that in the course of 2002 there has been a movement to invest more, relatively speaking, in euro, but I do not have the figures yet. The second part of your question was what is our strategy to increase that. The answer to that is that we are more or less indifferent; it is not our aim to have the world invest more in official reserves in euro. We will see what market forces achieve, but it is to be expected, to the extent that the international use of the euro increases – and it is a slow process – that trade between the euro area and the rest of the world will increasingly be quoted and paid in euro, and that the need for the rest of the world to hold more of its reserves in euro will increase. But that is indeed a very slow process that may take decades.
Question: Mr Duisenberg, in today's papers it was reported from Commission circles that the Commission is inclined to be lenient towards Germany in the event that it exceeds the 3% deficit criterion again this year, for fear of Germany slipping even further into a bad business cycle situation. What is your opinion? From your perspective, as someone responsible for monetary policy – is it wise to tolerate a country like Germany exceeding the 3% deficit criterion. If that were to be the case, what attitude would the ECB take to this attitude of the Commission?
Duisenberg: Well, first of all, I would not qualify the attitude of the Commission as being "lenient", as you put it. The Commission has now started the excessive deficit procedure, and rightly so. The German Government has accepted that, and rightly so. Now, if, in the future, the underlying assumption were disqualified, in other words growth were less than currently officially anticipated – that is less than 1ï¿½% – what attitude the Commission would then take remains to be seen. I would emphasise that it is the Commission which is the guardian of the Stability and Growth Pact, and the ECB plays no role, but – looking at our record in the past – we have at all times had good reason to support strongly any action that the Commission did.
Question: You said that the GDP growth outlook is broadly unchanged since your last meeting. However, manufacturing contracted for the fourth month in a row in December, unemployment numbers out of Germany today were bad, and there have been extremely bad retail sales numbers. Have the risks increased to the downside and, secondly, given the appreciation of the euro, what impact does that have on your growth forecasts, and would you now say that the euro is appropriately valued?
Duisenberg: I don't know whether it is appropriately valued, to take your last question first. I welcome the recent appreciation of the euro as a contributing force to keeping inflation under control. On the other hand, the recent further appreciation of the euro, as I believe Mr. Welteke has also said yesterday or today, has no negative impact on the competitive position of Europe vis-à-vis the rest of the world. Now to the first question. The risks to the downside have increased somewhat, due mainly to, may I call it, the lack of the disappearance of uncertainty that is prevailing. We had hoped that this uncertainty would gradually disappear and that is the main cause for concern. Our outlook for the medium term remained unchanged, despite what you have said about very recent figures. But the uncertainty is still prevailing and it permeates and pervades the minds of consumers and investors alike. The only thing I am inclined to say, the only factor of stability that people are certain about, is the stability of our monetary policy stance and with it we hope to contribute to a resumption of economic growth and a restoration of confidence.
Question: Mr. Duisenberg, every month we hear you call on governments to intensify the need for structural reform and yet we see Germany and other governments still moving very slowly on this. I wonder, bearing in mind you do say this month after month – this is clearly a very important thing as far as growth of the economy in the euro zone goes – whether you feel frustrated at the pace of reform.
Duisenberg: Not frustrated, but disappointed.
Question: Any hope for improvement?
Duisenberg: Oh yes. Hope for improvement, because in the end the people will not accept that there is not a greater impulse or drive for reform to bring down this high level of unemployment which we know has persisted for I do not know how many years. And if governments do not follow up on their original broad intentions as, for example, made known in the Lisbon declaration, so those governments who do not live up to that commitment will be punished, not by me but by the people.
Question: Mr. Duisenberg, first of all I would like to know when you will be aware of the results of your assessment of your two-pillar strategy? Will it happen before you retire in July?
Duisenberg: I expect so. We will be undertaking this evaluation in the course of the first half of this year.
Question: My second question – please forgive my indiscretion, but I have to write a story on this – is that in the event that Mr. Trichet were delayed by legal troubles, is it conceivable that you would not retire in July and stay on until he were appointed as successor?
Duisenberg: I can inform you that today I have written a letter to Mr. Solana, the Secretary-General of the European Council, asking him to set in motion the process of appointing successors to both Ms. Hämäläinen and myself. This is a pure formality, just as we did last year in the case of the departure of Vice-President Noyer. In this letter, I have repeated the sentence which I wrote in my letter to Prime Minister Aznar when he was the President of the European Council, in which I asked for my resignation by 9 July 2003 or at such time thereafter as the heads of state and government deemed to be in the interest of an orderly transition of the Presidency (of the ECB).
Question: Mr. President, you said that governments should place emphasis on growth-oriented consolidation policies. Could you be more precise about what you mean by "growth-oriented consolidation", especially in respect of what it means for tax policies? Thank you.
Duisenberg: Well, growth-oriented consolidation policies would mean, for example, that if you have to cut into expenditures it will be more growth-oriented if you cut into government consumption-oriented expenditures rather than into investment expenditures. That is one thing that is meant, and it is not simply Keynesian-type taxation measures that I am talking about.
Question: President Duisenberg, I have two questions. The first is on the use of the word "appropriate", which is back in your statement, and I wondered why, especially if downside risks have increased slightly over the last month? And the second question I have is: if it turns out that Mr. Trichet cannot be President of the ECB for some reason, would you favour that the search for your successor extend beyond France, or should it be limited to France?
Duisenberg: The last question I will not answer. I will not enter into any speculation about who will be my successor, as you can understand and as you undoubtedly anticipated. With regard to the appropriateness of the monetary policy stance, we were not so sure in December whether we could use the word. Now we are much surer that it is appropriate. We do see both upward and downward risks to inflation, and the lack of certainty, the lack of confidence and the slow movement of economic activity are helping to keep inflation down. Oil prices are doing the opposite. In the current circumstances our attitude is that we indeed regard this policy stance as "appropriate", and as far as the future is concerned it is "wait and see".